The economic recovery in Germany was brought to a standstill in the final quarter of 2020, the Bundesbank writes in its latest Monthly Report, stating that this was due to resurgent infection rates and the tightening of containment measures. According to the report, contact-intensive areas such as hotels and restaurants, bricks-and-mortar retail outlets and recreational and cultural services were particularly hard hit, whereas sectors not directly affected by the measures, such as industry, continued to recover. The construction sector also increased its output. Overall, however, economic activity was still almost 4% down on the pre-crisis level of the fourth quarter of 2019, the Bundesbank reports.

Exports of goods up significantly

Thanks to the further revival of world trade, German exports of goods were up substantially after price adjustment in the fourth quarter, write the Bundesbank’s economists. They note that there was a noticeably sharper increase in the volume of exports of goods to non-euro area countries than to the euro area. The value of exports to Japan, the OPEC countries, the United States and China was significantly higher. Broken down by category of goods, price-adjusted exports of intermediate goods recorded a particularly steep increase, according to the figures available up to November. Exports of capital goods were likewise up significantly, particularly in the case of motor vehicles. Exports of consumer goods were also higher, along with goods imports, which saw strong growth in the fourth quarter. Imports from non-euro area countries showed a steeper increase than imports from euro area countries.

Substantial rise in inflation rate in January

According to the report, the inflation rate declined considerably on average in 2020, falling from 1.4% to 0.4% year on year. Inflation was depressed by both the temporary reduction in VAT and the sharp fall in energy prices at the beginning of 2020. At the same time, food prices rose more sharply than in the previous year. Inflation climbed exceptionally steeply from -0.7% in December to 1.6% in January 2021. “The increase was thus even stronger than had been expected as a result of the reintroduction of the regular VAT rates and the implementation of the measures contained in the climate package,” write the Bundesbank’s experts, noting that this can be explained by adjustments to the expenditure weights underlying the Harmonised Index of Consumer Prices (HICP). Due to changes in the structure of households’ expenditure during the coronavirus pandemic, these adjustments were much more substantial than usual, they write.

Recovery expected to resume in second quarter

The Bundesbank’s economists are expecting aggregate economic activity to decline markedly in the first quarter of 2021 due to containment measures being tightened and prolonged. However, they are not anticipating that economic activity will sink to the lows recorded during the lockdown in the second quarter of last year. One reason they give for this is that many sectors that are hardly affected directly by the measures, such as industry, have continued to recover. Second, they point out that hard-hit sectors such as the hotel and restaurant sector and retail trade are increasingly adapting to the conditions of the pandemic.

However, industry might experience growing supply bottlenecks for a number of intermediate products owing, for example, to border closures or stricter border controls. “As infection figures decline, vaccines become more widely available and the containment measures are gradually eased, the current drags on growth should slowly recede, however.” The economy is therefore likely to resume its path of recovery from the second quarter, according to the report. However, the future outlook remains closely linked to developments in the pandemic, the report states, with the risk of further setbacks stemming from mutations of the virus, in particular.